The partial rehabilitation of bonds is the story behind the story of the Bank of Canada Governor’s recent comments on the outlook for interest rates.
Stephen Poloz said slack in the economy and an aging population will constrain future interest rate increases. Rates will indeed going higher when economic growth sparks inflation, but not to levels we thought were normal before the global financial crisis began in 2008.
Rising rates are negative for bonds, period. But Mr. Poloz’s comments suggest the downside for bonds may not be as bad as some investors fear. Now’s hardly the time to load up on bonds, but neither is it time to make big reductions in your exposure. Figure out what mix of stocks and bonds makes sense for your needs, and go with that.
This less menacing rate outlook for the next couple of years calls for a fresh look at how investors buy bonds. All online brokerage firms sell them, but there are big differences in how many they show clients online, in the yields you get when you buy bonds and in the types of bonds and bond alternatives available.
Before we look at how well online brokers do with bonds, let’s quickly review some bond-buying basics. A representative listing of a bond in a broker’s online inventory this week started like this: “Rogers Communications 4.700 2020/09/29.” Next came a price quote, in this case “109.096”; a yield, in this example “3.122 per cent”; quantity available, in this case “92,000”; and, finally, a credit rating, which here is “BBB (high).” Here’s what these numbers mean:
- 4.700 [per cent]: That’s the coupon, or the annual interest rate based on the price when first issued.
- 2020/09/29: The maturity date.
- 109.096: Brokers typically have a $5,000 minimum for the face value of a bond purchase, which is the amount you get on maturity. The price in this case means you’d have to spend $5,454.80 to get back $5,000. This price reflects the attractive 4.7 per cent coupon. A bond’s price when issued is 100.
- 3.122 per cent: The annualized return you’ll get from this bond if held to maturity. The yield is less than the coupon because the price of these bonds has risen. The more you pay for a bond, the less yield you get.
- 92,000: There is $92,000 worth of these bonds available for investors to buy.
- BBB (high): This is an investment-grade credit rating. Below BBB means a bond is considered high yield, or speculative.
- Bond trading is one of many factors considered in The Globe and Mail annual ranking of online brokers.